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AMD shortfall gives Intel momentum, for now

The news from AMD that it will not make its revenue projections for Q1 points up a worrisome trend for the Sunnyvale, Calif., chipmaker.

The rivalry between Advanced Micro Devices (AMD) and competitor Intel Corp. is sounding more and more like a tale of two chippies, with AMD coming up short by comparison.

AMD warned investors Monday that it expects revenue of $1.23 billion for the period ending March 31, rather than the $1.6 billion to $1.7 billion projected earlier. That's 25% below the lower end of the earlier estimates and, more telling, a worrisome slip from the $1.33 billion in revenue for the same period a year ago.

This is a game of leapfrog.
Jim Burton
senior analystIdeas International Inc.
While the shortfall by no means signals the worst of times for AMD, the trend continues to go the "wrong way," said Gartner Inc. analyst Martin Reynolds. Intel is determined to make life difficult for AMD and doing a pretty good job of it, he said.

"For a while there, when AMD had these really great products, they were moving ahead of Intel in terms of market share. Then in the middle of last year Intel announced its new processors, the Core 2, which obviously it has used to put a crimp on AMD," said Reynolds, who covers the semiconductor industry for the Stamford, Conn.-based technology research firm.

The market for servers went soft at the end of 2006, for reasons not altogether clear, Reynolds said, but at least in part because customers held off buying until they checked out Intel's new offerings.

Before Intel's introduction of the Core 2 technology, buying from the Santa Clara, Calif.-based chipmaker didn't "make any sense" for many customers, Reynolds said. "But that was the result of Intel being behind, not AMD not being particularly ahead."

Indeed, with its Core 2 products, Intel has managed to put the squeeze on AMD at both the premium and lower-priced ends of their markets, Reynolds said, out-competing AMD on the high-performance products and forcing AMD to sell its slower products at a steep discount.

2+2 > 4

For the time being, Intel has out-strategized AMD with its Core architecture, Reynolds said. Intel, by putting two dual-processor chips in the same package, is turning products low on the totem pole of performance scale into luxury-line goods. "Instead of having products as unsaleable, you can now sell them at a premium price. What this means is that Intel doesn't have slower processors and they have a better supply of very fast ones," Reynolds said.

AMD's new 3 gigahertz processors "look pretty good," Reynolds said. "The performance numbers are nice, they are moving the state of the art forward and they look better compared to Intel's dual-core Xeons."

However, he added, Intel's four-core processors outperform these dual-core products. AMD's new processor, code-named Barcelona, is the company's four-core answer, Reynolds said, "but we don't expect that until the second half, and by that time Intel will move its products forward another step as well."

Jim Burton, vice president and senior analyst for entry servers and blades at Ideas International Inc. in Rye Brook, N.Y., agrees that Intel has the momentum.

"This is not so much about AMD faltering as Intel really picking up the ball and running with things," Burton said.

When Intel CEO Paul Otellini took the reins in 2005, he "lit a fire underneath Intel, got out all the dead wood and he focused on what needed to be focused on," Burton said. One of the outcomes was the Core 2 Duo. That was followed by the quad-core Xeon. "The core architecture is what got Intel going," he said.

AMD's Barcelona will trump Intel, if the rumors pan out, Burton agreed, but probably not for long. "Intel has the 45-nanometer technology later this year, they have 15 products under development and look like they are on track for that. This is a game of leapfrog."

AMD also announced plans Monday to restructure its business model to increase "operating efficiencies and lower its operating costs structure." This includes cutting capital expenditures in 2007 by $500 million. AMD said it did not expect the reduction to affect production. But Intel's disciplined approach to capital spending -- even in lean times and layoffs -- could put AMD at a disadvantage on the manufacturing front also, Reynolds said. AMD said it will flesh out its restructuring plans during a conference call April 19.

More on AMD, Intel
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All that said, Reynolds cautioned, no one should count out AMD, which has triumphed and failed and gloriously triumphed again throughout its illustrious history. Most of the growth in computing now is in mobile devices owned by individual consumers. The company's recent purchase of ATI Technologies for a rich $5.4 billion may yet pay off. ATI gives AMD the capability of building "incredibly low-cost" mobile computers and still being profitable. Beating Intel to market with low-cost mobile technology could turn the tables for AMD, and "they could come back again," Reynolds said.

AMD stock rallied on the news of the restructuring, rising 3.8% to close at $13.35 per share. However, that pales by comparison with the 68% decline in share price since January 2006. As for changes at the top at AMD? Reynolds believes Chairman and CEO Hector Ruiz, whose career at AMD has been marked by success, will be given "at least a few more quarters" to turn things around.

Burton agreed. "They are going to wait until Barcelona comes out before they start asking for heads."

Let us know what you think about the story; email: Linda Tucci, Senior News Writer

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